On the Blockchain Gang: What Illinois' Draft Digital Asset Tax Rules Would Require

The Illinois Digital Asset Tax Act (the Act), enacted earlier this year as part of Public Act 104-0468, imposes a 0.2 percent tax on the privilege of receiving certain digital asset business activity from a digital asset broker in Illinois effective January 1, 2027. Unlike many transaction taxes, the tax is imposed on the value of the digital asset involved in the transaction rather than on the broker's fee. 

The Illinois Department of Revenue (IDOR) on September 28, 2026, released draft proposed regulations (86 Ill. Adm. Code Part 497) implementing the Act, providing the first detailed look at how the department intends to administer the new tax. IDOR is accepting informal public comments on the draft proposed rules before formal rulemaking begins, with a comment deadline of 5 p.m. CT on October 30, 2026.

The proposed regulations address several foundational questions left open by the statute, including what qualifies as a "digital asset," who constitutes a "digital asset broker" and what activities constitute taxable "digital asset business activity." At the same time, the proposal raises a number of practical and policy questions regarding valuation, sourcing, decentralized finance (DeFi) transactions and compliance obligations.

Key Definitions

What Is a "Digital Asset"?

The proposed regulations define "digital assets" as blockchain-based digital representations of value used as a medium of exchange, unit of account or store of value that are not fiat currency. 

The regulations specifically contemplate that the tax generally applies to:

• traditional cryptocurrencies
• stablecoins
• meme coins
• blockchain-based central bank digital currencies
• other blockchain-based assets pegged to physical goods or currencies

The regulations exclude several categories of assets from the definition of digital assets, including:

• rewards and loyalty points
• gaming currencies
• tokenized securities and commodities
• tokenized art and other intellectual property
• collectibles and event tickets
• prepaid cards
• non-fungible tokens

Who Is a "Digital Asset Broker"?

The regulations define a "digital asset broker" as a person that, for consideration, regularly provides services effectuating digital asset transfers on behalf of others. The proposal identifies several categories of brokers, including:

• centralized exchanges
• certain DeFi platforms that collect protocol fees
• custodians, broker-dealers, digital payment processors and similar custodial service providers

The draft regulations also provide that certain out-of-state brokers may be treated as maintaining a place of business in Illinois if they exceed $100,000 of gross receipts from digital asset business activity provided to Illinois customers.

The regulations exclude certain decentralized platforms, digital asset issuers and businesses that provide digital asset services solely through third-party brokers. In addition, retailers that accept digital assets as payment generally are not treated as digital asset brokers.

What Is "Digital Asset Business Activity"?

The tax applies to a customer's receipt of "digital asset business activity," which consists of the exchange, transfer or storage of digital assets on behalf of a customer. 

The regulations provide broad definitions of each category. Exchange activities include: 

• spot trading 
• fiat-to-crypto transactions 
• crypto-to-fiat transactions 
• certain derivatives settled in stablecoins 
• cross-chain bridging transactions

Transfer activities include:

• transfers between wallets
• transfers facilitated by banks, financial planners and wealth managers
• transfers between wallets owned by the same customer

In one example, a transfer between a customer's personal and business wallets constitutes a taxable transfer where a broker facilitates the transaction for consideration and the transfer is reflected on the blockchain. 

Storage activities generally involve the custody of digital assets by a third-party broker. The regulations attempt to avoid multiple layers of tax where storage is incidental to an exchange or a transfer, but they contemplate separate taxation when consideration is paid specifically for storage services.

When Does a Taxable Transaction Occur?

The regulations also introduce a four-part test for determining whether a taxable event occurs. To be taxable, a transaction must:

1. involve an Illinois customer
2. include the customer's receipt of digital asset business activity
3. be provided for valuable consideration
4. be conducted by a digital asset broker

The activity also must be reflected by a blockchain entry, a requirement that appears in the draft rules but is not expressly found in the statute itself. 

Valuable Consideration and DeFi Transactions

The regulations define "valuable consideration" broadly to include exchange fees, subscription fees and other charges imposed by a digital asset broker for providing digital asset business activity. However, network fees, gas fees, and validator or mining fees generally are excluded.

The regulations also draw an important distinction for DeFi transactions. Transactions conducted through DeFi platforms generally are not taxable unless valuable consideration is paid. Protocol fees charged by a platform may constitute valuable consideration, whereas swap fees directed solely to liquidity providers and network fees generally do not.

Sourcing and Valuation

For electronic transactions, the regulations establish a rebuttable presumption that a customer is located in Illinois if available customer information reflects:

• an Illinois home or business address
• an Illinois mailing address
• an Illinois IP address
• an Illinois place of primary use

The regulations permit brokers to rely on federal know-your-customer documentation and similar records, including IRS Form W-9, when determining customer location. They also adopt a look-through approach where intermediaries act on behalf of customers, sourcing the transaction to the underlying customer rather than the intermediary.

Perhaps most significant, the tax is imposed on the value of the digital asset involved in the transaction rather than the fee charged by the broker. As a result, relatively low-fee transactions involving significant digital asset value may generate substantial tax liability. The regulations provide no exception for volatility. 

The regulations also do not expressly address whether multistep transactions involving multiple exchanges or transfers of the same digital asset may give rise to multiple taxable events.

Compliance Requirements

The proposed regulations would impose significant compliance obligations on digital asset brokers. Brokers generally would be required to register with IDOR, collect and remit the tax, file monthly returns, and maintain records supporting customer location and taxable transactions. Remote brokers should also evaluate whether they satisfy the draft regulations' $100,000 Illinois gross receipts threshold.

The recordkeeping requirements are particularly noteworthy because they would require sufficient documentation to track digital asset movement, including account information and, in some cases, private keys. As a result, affected businesses may need to evaluate both operational and cybersecurity implications associated with maintaining such records.

Open Questions

Although the proposed regulations provide meaningful guidance, several important questions remain unresolved:

Staking, Lending and Mining. The regulations define staking, lending and mining activities but provide little guidance regarding whether, when or how rewards, yields or newly created digital assets may be subject to tax.

Storage and Recurring Custody Arrangements. The regulations attempt to distinguish between taxable storage services and storage that is merely incidental to an exchange or transfer. However, questions remain regarding how the tax applies to subscription-based custody arrangements and recurring storage fees.

Spread-Based and "Zero-Fee" Business Models. The regulations define "valuable consideration" by reference to broker-imposed fees and charges but do not address whether spread-based compensation models or platforms advertising "zero-fee" transactions satisfy that requirement.

Internal Ledger Transactions. Certain provisions reference movement on a blockchain or internal ledger, while others appear to require a blockchain entry for a taxable event. This distinction could affect the tax treatment of transactions reflected solely through internal bookkeeping entries.

Federal Reporting Obligations. The regulations do not address how Illinois registration, filing and reporting obligations will interact with federal digital asset broker reporting requirements, including Form 1099 reporting regimes applicable to digital asset transactions.

Holland & Knight Insight

The proposed regulations provide the first meaningful guidance on the scope and administration of Illinois' new digital asset tax. Although the draft rules answer several threshold questions regarding covered assets, broker status and taxable transactions, they also underscore the breadth of the new regime, particularly because the tax is imposed on the value of the digital asset involved in a transaction rather than the fee charged by the service provider. 

The draft regulations also leave several important issues unresolved, including the treatment of staking and lending activities, spread-based compensation models, multistep transactions, and the apparent tension between blockchain-entry and internal-ledger concepts used throughout the rules. In addition, the proposed registration, sourcing and recordkeeping requirements, including requirements relating to private-key information, could create significant compliance obligations for exchanges, custodians, payment processors and other digital asset businesses. 

Businesses with Illinois customers should evaluate whether they may be treated as digital asset brokers, assess how the tax could apply to existing transaction flows and custody arrangements and consider participating in the comment process before the October 30, 2026, deadline.

For more information, contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.